Housing Starts Plunged 11.7% in October

New home construction in the U.S. took two steps back last month, as housing starts unexpectedly plunged 11.7% to a 519,000-unit annual rate in October, and September's total was revised downward to a 588,000-unit annual rate from the initially-estimated 610,000-unit rate, according to the latest report from the Census Bureau and the Department of Housing and Urban Development.

The September revision underscores why economists caution investors not to put too much faith in the initially-released housing starts data: That data contains a significant margin of error and revisions can be large. Analysts also underscore that it can take three to five months for a housing trend to form, and retrenchments are common: One occurred as a result of the revised September data, which turned a three-month uptrend into a two-month dip.

Economists surveyed by Bloomberg had expected October housing starts to come in at a 590,000-unit annual rate. Housing starts totaled a 614,000-unit annual rate in August, and a 529,000-unit annual rate a year ago, in October 2009. Starts hit a cyclical low of a 477,000-unit annual rate in April 2009.

A drop in starts of multifamily units, which include condominium and apartment complexes, accounted for almost the entire October decline: They plummeted 47.5% to a 74,000 rate from 141,000 in September. Single-family home starts dipped 1.1% to a 436,000 rate from 441,000.

Building Permits Inch Higher

One bright spot in the report was that building permits -- considered a leading indicator of housing construction -- rose 0.5% to a 550,000 annual rate.

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Regionally, the nation was divided on housing starts: They rose in two of the four regions -- up 12.9% in the Northeast and 1.0% in the Midwest -- but sank in the other two, dropping 13.4% in the South, and plummeting 30.5% in the West.

Overall, October saw a setback for the U.S. housing sector, even after one takes into account the typical, seasonal slowdown that occurs in construction as winter approaches.

The reasons for this retrenchment are not a mystery: The supply of both new and existing homes is simply too large, and demand too low, for builders to start new projects en masse.

What will it take to enable housing starts and the single-family home building segment to rise in a sustained way? No two economic recoveries are identical, but if history is any indicator, the U.S. economy will have to demonstrate that it can add about 150,000 to 200,000 jobs per month for three to five months before home builders gain confidence that household formation is rising in a sustained way, and that they won't be left with a lot of unsold homes after they make the large capital investments necessary to build them.